John Taylor’s May 21 blog post discusses the stimulus multiplier used for the ARRA and new research from the IMF with regard to actual stimulus multipliers.
The chart shown has immense significance on a variety of fronts, assuming that the IMF research is representative of the effectiveness of stimulus spending.
We, as a nation, do ourselves no benefit by continually overestimating the (gross) benefits to be derived by stimulus actions.
As I’ve previously commented, I don’t believe the concept of stimulus spending is well understood. My previous writings on stimulus can be found here. Stimulus spending is of particular noteworthiness as I believe that we will continue to enact stimulus spending in significant amounts.
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SPX at 1089.41 as this post is written
I found this passage from Milton Friedman in 1958, as seen on John B. Taylor’s blog, to be notable, especially given the immense monetary and fiscal policy actions taken to “improve” our economic situation:
“The available evidence…casts grave doubt on the possibility of producing any fine adjustments in economic activity by fine adjustments in monetary policy….and much danger that such a policy may make matters worse rather than better…The basic difficulties and limitations of monetary policy apply with equal force to fiscal policy.
Political pressures to ‘do something’ …are clearly very strong indeed in the existing state of public attitudes.
The main moral to be had from these two preceding points is that yielding to these pressures may frequently do more harm than good. There is a saying that the best is often the enemy of the good, which seems highly relevant. The attempt to do more than we can will itself be a disturbance that may increase rather than reduce instability.”
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SPX at 1135.68 as this post is written
John B. Taylor had a blog post on May 1, 2010 that discussed the impact of government stimulus on GDP. The post is titled “Latest Data Continue to Show Little Impact of Government Stimulus on GDP.”
One of the reasons that I write extensively about interventions, which includes stimulus programs, is that I believe we, as a nation, will continue to do them. This is highly problematical for a number of reasons. I’ve previously written of this issue in the article “My Overall Thoughts On The Bailouts, Stimulus Measures and Interventions”.
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SPX at 1171.67 as this post is written
Up to this point, I have yet to mention “Keynes” or any derivative thereof. The reason for this is simple – I don’t believe that the efforts taken to stimulate the economy are reflective of the theories that Keynes espoused. Instead, they are a type of “bastardized” Keynesian Theory – used by various parties in an attempt to “legitimize” the tremendous amounts of money spent on various stimulus plans.
I’ve been meaning to write a blog post about this and other related topics. I still intend to write a fuller post. However, what prompted me to write about this now is a very interesting article I ran across in Fortune Magazine. It is a February 5 interview with Allan Meltzer and can be found at this link.
As Meltzer indicates in the interview, Keynesian Theory is not aligned with the stimulus actions we, as a nation, have undertaken.
SPX at 1105.24 as this post is written
“One of the biggest economic myths since the Great Depression is that governments can ameliorate or counteract the ebbs and flows of free markets. Government spending has never worked as a trigger for sustained and vibrant economic growth. Ever. Scholarship has demonstrated that the New Deal perpetuated the Depression rather than cured it. On the eve of the Depression the U.S. had the lowest unemployment rate among developed nations. But a decade later, despite six years of FDR’s New Deal, our unemployment rate was one of the highest among developed economies. Japan’s serial stimulus programs over the past two decades have repeatedly underscored this truth.”
Steve Forbes, Forbes Magazine, March 1 2010 p. 11 (link found here)
I have written extensively about interventions, which includes stimulus spending. Stimulus spending and interventions are widely (and wildly) misunderstood.
I think it is very important to have a full understanding of how the ARRA, a very large stimulus, is performing. As I wrote in a July 9 2009 blog post in which I discussed the ARRA, “Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted.” As such, it should be of little surprise that the ARRA has been, at best, such a poor performer when analyzed in a variety of manners.
Here is a recent article from Alan Reynolds concerning the effectiveness of the ARRA. Although I don’t necessarily agree with some of his conclusions, he does present some interesting statistics and views with regard to how the ARRA has performed.
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SPX at 1102.34 as this post is written
In the Wall Street Journal on Saturday, February 13 there was an editorial titled “High-Speed Spending.” This discussed the dubious financial dynamics of a long-proposed “high speed” Orlando-to-Tampa rail project.
I also heard of a proposal to do a similar project between St. Louis and Chicago.
I have lived in the Chicago area for most of my life and have never heard anyone expressing a desire to have faster transportation (or such a “high speed” rail option) between St. Louis and Chicago. Yet, in this case, as in the Orlando-to-Tampa case, the proposed “high-speed” rail project would cost billions of dollars.
If we are looking to spend money on infrastructure, perhaps it would be wiser to spend on our existing infrastructure, which is literally crumbling. Estimates to fix our existing infrastructure range into the trillions of dollars. These estimated figures are rapidly growing.
Examples of wasteful deficit spending are innumerable, unfortunately. In my opinion, we, as a nation, are not in a position to waste any money at this point.
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SPX at 1102.12 as this post is written
Here is a Wall Street Journal editorial from Monday:
I found it interesting for two reasons. First, it has a chart that shows the actual Unemployment Rate vs. that forecast in “The Job Impact of the American Recovery and Reinvestment Plan.” Currently the Unemployment Rate is approximately 2% above the rate forecasted with the stimulus.
Second, the editorial mentions the idea of an employment tax credit, i.e. granting a tax credit to employers who hire. This is yet another stimulus idea, and as such is subject to the same risks and unintended consequences that I have previously written of. Apparently one idea is to grant a $3000 tax credit for each new hire in 2010.
I don’t believe an employment tax credit will solve, or present a significant solution to, our national unemployment problem. As I wrote in the “Why Aren’t Companies Hiring?” blog series, listed here:
the Unemployment problem is not simple in nature.
SPX at 1092.02 as this post is written
Here is an October 5 Wall Street Journal editorial reviewing the “Cash For Clunkers” stimulus plan:
Also, to provide perspective, a chart of Vehicle Sales from the CalculatedRisk blog (10/1 post) at this link:
As one can see, the “Cash for Clunkers” seems to have been successful in temporarily causing a surge in auto sales for July and August.
One could casually observe that the program was successful, in that it caused a short-term sales spike and the purported associated economic and environmental benefits.
However, this observation would be flawed, as many other factors are present as well. I mentioned some of them during my August 4 post that is found here:
SPX at 1057.58 as this post is written
Here is an October 1 op-ed in The Wall Street Journal titled “Stimulus Spending Doesn’t Work” :
Although I don’t concur with some of the statements in this Op-Ed, I do believe that its overall message and conclusions are important.
SPX at 1054.72 as this post is written
Below is a link to a September 17 Wall Street Journal op-ed titled “The Stimulus Didn’t Work” :
I found the argument presented by the authors to be very interesting and well worth reading.
SPX at 1071.78 as this post is written